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Low-Rated Stocks That Deserve Your Support

Shareholder-friendly stocks that many expect to underperform the market.

In the wake of the options-backdating fiasco and the scandals that ruined investors in Enron and WorldCom, "corporate governance" became the watch phrase of the new millennium. One result was the Sarbanes-Oxley Act, a tough, costly, and -- some argue -- overly burdensome means of keeping a closer eye on corporate management.

A lot of water has passed under the bridge since then. Although "corporate governance" doesn't excite investors the way it once did, keeping tabs on the risks that our companies and their boards pose is still a worthwhile pursuit. Companies with poor corporate governance could become targets for shareholder activists, hedge funds, or short-sellers. They could be ripe for a fall. Some evidence supports the notion that those with stronger governance have lower risk, increased profitability, and higher valuations.

Below, we'll be looking at stocks that investors on Motley Fool CAPS have said will underperform but that hold above-average Corporate Governance Quotients (CGQs). Developed by proxy service Institutional Shareholder Services -- you might have run across the group when it weighs in with opinions on corporate mergers -- a CGQ measures how well a company performs in up to 63 categories covering four broad areas. It also scores a company relative to its market index and its industry group.

Here are five that I'm highlighting today:

Company

CAPS Rating(Out of 5)

Index CGQ

Industry CGQ

Circuit City(NYSE:CC)

*

97.9%

93.0%

Citigroup(NYSE:C)

**

89.4%

98.7%

General Motors(NYSE:GM)

*

97.1%

100.0%

SIGA Technologies(NASDAQ:SIGA)

**

82.1%

62.9%

Sprint Nextel(NYSE:S)

**

89.6%

97.9%

Sources: Yahoo! Finance, Motley Fool CAPS.

Although there are many factors an investor should consider before buying a stock, how well it treats shareholders shouldn't be least among them. View these rankings as a way to gauge how these businesses stack up against one another relative to their shareholder policies.

Tuning inWhen Blockbuster(NYSE:BBI) came knocking with a takeover offer, it awakened many to the potential value locked inside ailing electronics retailer Circuit City. Although one could argue that the movie-rental company would realize synergies from the electronics retailer, particularly as high-definition TV and movie sales progressed, it was an idea that short-circuited common sense.

Circuit City has failed to impress CAPS investors who just can't get beyond Best Buy(NYSE:BBY) as the better alternative, both for shopping and investing. As player compfreak999 says:

My bad side is telling me to purchase some shares for the short term, my good side (logical) is telling me no no no.

Rationale?

1. Circuit City is an inferior good compared to Best Buy. Why shop at Circuit City when you can shop at Best Buy?

2. No turn around in sight

3. Circuit City's buyout seems less and less likely to me. First off, [the] cash asset is quickly dwindling, hence making them less attractive. Also given the liquidity issues on Wall-Street [Blockbuster] will be hard pressed to finance the purchase ([Icahn] support? Who knows)

This player foresaw the Blockbuster deal dying. The movie maven withdrew its offer yesterday.

Dialing inDoes Sprint Nextel have an iPhone killer, or at least a formidable match, on its hands? Could be, if the initial reports of its Instinct smartphone sales hold up over the longer term. With a $130 price tag and a $100 million marketing budget backing it, the Motley Fool Inside Value recommendation may become a contender once again.

In dire cases such as the one Sprint has found itself in, being able to remake yourself is difficult enough, let alone being necessary for survival. Yet some investors think the company is making the changes needed for the next stage. As DragonSworn says, "With Sprint making changes to [their] departments like bring order support and telesales back home is the first step to show everyone they are listening and trying to rebuild to the rep that Nextel once had when it was a [separate] company."

A Foolish quotientMany factors go into whether a stock is a buy or sell, not least of which is your opinion. Head over to CAPS today, and share your thoughts with other investor analysts on whether you think these stocks make the grade.

Author

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.